The KRW684.2 billion ($668 million) K-Power financing closed 9 December, and marks a genuine first for project sponsors in Asia. The arranger and financial adviser behind the Korean project financing are hailing the deal as the first true merchant power financing in the Asia-Pacific region outside of Australasia.

The K-Power project, sponsored by SK Corporation (65%) and BP (35%) consists of a 1,074MW combined cycle plant in Kwangyang, South Korea. The plant will be fueled by LNG and the first of the two units making up the power plant is due to become operational on 31 December 2005.

?SembCogen in Singapore is often regarded as the first merchant power financing in Asia,? says Mike Samson, vice-president at ABN Amro, Singapore, ?but vesting contracts were in place for about 60% of its capacity. There are no vesting contracts in place for K-Power.?

The financing was an almost entirely domestic affair, comprised of a KRW440.5 billion term loan tranche with a tenor of 14.5 years (including a six-month grace period) and an annually renewable US Dollar-denominated $20 million standby letter of credit facility. The term loan priced at 220bp over the AA, three-year, Korean corporate bond for the construction period, dropping to 195bp after commercial operations commence. Korea Development Bank was mandated arranger and sole underwriter. Financial adviser was ABN Amro, which also acted as LNG purchasing adviser.

Joseph Bevash, a partner at Latham & Watkins (representing the lenders) notes that the sponsors did initially consider a multi-tranche financing with a significant offshore facility and included a number of international banks in funding discussions at the end of 2003 and early 2004.

But banking sources indicate that export credit finance was relatively uncompetitive. Moreover, without a guarantee from the sponsors or government, and with an uncertain power market environment, international banks were not as supportive of the deal as their Korean counterparts.

Clarinda Tjia-Dharmadi, also at Latham & Watkins, says that the reform of Korea's power market is ongoing. ?The rules for opening up the market are unclear and it is not certain when the cost-based pooling system which the Korean government says it wants to establish will come into place,? she says. A pricing adjustment mechanism was included in the financing in case the government's plans for the power industry are altered.

Despite the uncertainties surrounding K-Power's status as Korea's first merchant plant, the deal was well received in the Korean market and was rapidly syndicated. A presentation was made to potential lenders on 9 November and signing took place just a month later. Woong-Chan Park, deputy general manager in KDB's finance department, says the syndication was almost twice oversubscribed and, as a result, KDB scaled back its initial loan commitment of KRW150 billion.

Thirteen financial institutions including KDB are lending to the project. KDB itself eventually committed KRW120.5 billion, while co-arrangers National Agricultural Cooperative Federation and Shinhan Bank hold KRW40 billion each and Chohung Bank and Woori Bank both take KRW35 billion. Participants include Korea Life Insurance with KRW40 billion, Kyobo Life Insurance with KRW30 billion and Daegu Bank, KIUP Bank, LG Fire & Marine Insurance, Pusan Bank, Samsung Fire & Marine Insurance and Samsung Life Insurance, which all provide KRW20 billion. Repayment will be on a quarterly basis

The tenor itself is notable, says Samson. ?In Korea, this is the first project financing minus a government or sponsor guarantee or PPA to stretch to this tenor.? Park says that a cash deficiency support feature is included in the financing, with a cap of KRW50 billion.

The Korean lenders were attracted by the project's cost competitiveness. The LNG purchasing strategy played a large part in driving down the projections for cost of electricity. Tjia-Dharmadi, notes that K-Power is the first Korean project to buy LNG from a supplier other than Korea Gas, which has, up until now, been the country's monopoly LNG supplier. The gas will come from the Tangguh venture in Indonesia under a 20-year sale and purchase agreement. ?Other gas-fired power stations receive LNG from Kogas, which provides LNG at a basket rate. This rate is derived from Kogas' pool of LNG purchase contracts, some of which stretch back about 15 years,? says Samson. ?As a result the Kogas price does not benefit as much from the current, low cost environment for LNG.?

Tjia-Dharmadi says the financing closed before Tangguh's sponsors have made their final investment decision (FID). ?A bridge fuel mechanism has therefore been put in place to take care of complications regarding LNG supply,? the lawyer says. A drop-dead date by which time the FID must be made has also been included in the sales contract. If the FID is not made by that date, the LNG contract will switch to another supplier. K-Power is also due to begin operating before Tangguh comes on stream. Tangguh's sponsors are therefore obliged under the sales contract to deliver LNG to K-Power of the same quality from any of a number of pre-specified fields.

Banks also drew comfort, says Samson, from the up front commitment shown by the sponsors. ?By the time the financing closed, much of the equity had already been put into the project, as both SK and BP wanted to keep to the schedule stipulated by Korea Electric Power Corp. That meant there was none of the usual risk associated with commitment of equity,? the banker says. Indeed, plant construction was already a third complete when the financing closed, with all the initial costs funded by equity. The debt to equity ratio for the project, including the working capital facility, is approximately 62:38.

Sources indicate that 10 to 15 new power plants in Korea will be built on a merchant basis over the next decade.

K-Power
Status: Signed December 9, 2004
Size: KRW684.2 billion (total project cost)
Location: South Korea
Description: Financing of Korea's first merchant power plant
Sponsors: SK Corp, BP
Debt: KRW440.5 billion term loan, $20 million standby letter of credit facility
Arrangers: KDB (lead) National Agricultural Cooperative Federation, Shinhan Bank (co-arrangers)
EPC: Daelim Industrial Corp
Legal counsel to sponsors: Baker & McKenzie
Legal counsel to lenders: Latham & Watkins, Kim & Chang
Financial adviser/LNG adviser: ABN Amro
Technical adviser: Parsons
Independent engineer: Black & Veatch
Market adviser: Henwood (sponsor) Charles River Associates (lenders)
Lender LNG advisers: Korea Economic and Energy Institute
Insurance: Marsh Korea (sponsor) Jardine Lloyd Thomson (lenders)